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What is Ebit?

If you have heard words like “Operating Profit”, “Operating Earnings”, “Profit Before Interest and Tax” and “Operating Income”, then you are not far away from understanding “Earnings Before Interest and Tax”. In this article you’ll get acquainted with EBIT (Earnings Before Interest and Tax).

All the income, derived from an investment or product, excluding the payment made for interest and taxes is defined as ‘EBIT’. In other words, EBIT is the overall profits before taking into account interest payments and income taxes. By excluding both taxes and interest expenses, the figure hones the company's ability to earn profit and thus makes way for easier cross-company comparisons. It stands as an important factor to estimate fixed charges cover ratio as well as return on capital employed. Without actually finding EBIT no one can ever check and regulate degree of leverage in their enterprise.

What does EBIT stands for?

The abbreviation ‘EBIT’ stands for “Earnings Before Interest and Taxes”. It is also known as Profit before Interest and Tax. It is used to estimate Earning per Share. Usually, it is calculated by using Income Statement.

Apparently, it is crystal clear that operating income or EBIT is the most important facet in valuing a company as a whole. This is the reason why we define operating income as income which is earned in the ordinary life of the business from the overall trading activities.

How do you find EBIT?

One can find EBIT or earnings before interest and tax by deducting Variable Costs & Fixed Costs from net sales. It can also be calculated as receipts or revenues minus COGS & Operating Expenses. Operating Expenses are like wages, Research & Development, rent paid etc. These include selling, distribution and administration expenses.

By finding EBIT, there are more chances to compare profit earning capacity of various companies across a single industry and also it establishes benchmarks so as to meet the standards of the industry.We also have:

EBIT = Revenues – Operating Expenses + Non Operating Incomes

EBIT Margin

EBIT margin is the correlation of income gathered before interest and taxes to net revenue earned. It keeps a check on profit earning capacity of a company over sales during a fixed period of time. Variations in EBIT margin also make a difference in the profitability of the company. A high EBIT margin results in more profitable business with a superior cost management. The case of low EBIT margin is a result of higher operating costs. Comparing EBIT Margin of various companies across a single industry is also responsible to move decisions for their business models.

A small EBIT margin is a proof of high sales volume. A positive EBIT margin raised over a longer period is the result of strong and concrete business model of the company.

EBIT and net revenue are prime facets for computing EBIT margin. One can calculate EBIT margin using following formula:

Example of EBIT Margin

Calculate EBIT Margin of ABC company for the year 2014 with the following information:-EBIT = $ 2855mNet Revenue Earned = $ 3905mEBIT Margin (2013) = 65%

Therefore,

There has been an increase in EBIT margin of ABC Company since last year. This depicts an efficient profitability status of the company as it has been raised by 8.11%.

Rutherford Corporation Income Statement ($ in Millions)

Particulars

Amount (in $)

Net Sales

1409

Less:- Cost of goods sold

(460)

Less:- Depreciation

(55)

EBIT

894

Less:- interest Paid

(170)

Taxable income

724

Less:- taxes

(312)

Net Income [Earnings After Interest & Taxes]

412

If we look at Rutherford Corporation's Income Statement, we see that earnings before interest and taxes (EBIT) are $894 m. This is almost what we want since it doesn't include interest paid. We need to make two adjustments. First, recall that depreciation is a non-cash expense. To get cash flow, we first add back the $55 in depreciation since it wasn't a cash deduction. The other adjustment is to subtract the $312 in taxes since these were paid in cash.

Is EBIT the same as Net Income?

The results of financing decisions are reflected in the remainder of the Income Statement. When interest expenses and taxes, which are both influenced by financing decisions, are subtracted from EBIT, the result is net income. This clearly represents how EBIT differ from net income.

Net income is, in a sense, the amount available to owners of the firm. Interest and taxes have to be paid before you arrive at net income. We can account a negative EBIT & Net Loss on a single platform. This is because a negative EBIT is the result of loss.